Terra Stablecoin Peg Slips Below $0.70 – Despite Loan From Bitcoin Reserves

In short

  • The Luna Foundation Guard has deployed $1.5 billion in reserve assets to solidify the UST’s foothold.
  • Nevertheless, the price of the stablecoin, which is expected to be $1, continued to decline.
  • The de-anchoring comes in a context of general market decline.

Terra’s UST, the third largest stablecoin by market cap, fell to $0.69 in Monday’s trading, an all-time low according to data from CoinMarketCap, even after Terra-backing Luna Foundation Guard made a $1.5 billion loan to consolidate the currency. On Coinbase, the listed price has gone down to $0.65.

Terra is a blockchain network with its own dollar-based stablecoin, UST. Unlike USDC and Tether, which are apparently backed by cash and banked assets, the UST stablecoin is designed to maintain a 1:1 parity with the US dollar via its algorithmic relationship with the native Terra asset. , LUNA. Hitting LUNA requires burning UST and vice versa – and arbitrage opportunities are meant to keep UST as close to $1 as possible.

So when the price drops to, say, $0.99 as it did over the weekend, traders can rush to buy at a discount and then sell at $1.00 and pocket the difference. Order is theoretically restored because the free market does all the work.

But the Luna Foundation Guard (LFG), co-founded by Terra co-creator Do Kwon, wasn’t so sure it would work, given the larger crypto market crash that has taken place over the past five recent days, which has seen the crypto market capitalization rise from $1.8 trillion to $1.4 trillion.

So, over the weekend, he decided to use a support strategy that he has been pursuing for a few months. As of May 3, LFG had stored nearly $4 billion of Bitcoin, Avalanche, UST and LUNA for its reserves that it could fall back on in case the algorithm stops working.

As the price of the stablecoin slid to $0.985 over the weekend, it vote lend $750 million in Bitcoin and $750 million in UST to “proactively defend the stability of the $UST peg and the broader Terra economy, particularly in a time of volatility and uncertainty macroeconomic conditions in legacy markets”.

The whole point of maintaining a reserve of Bitcoin and other cryptocurrencies was precisely for this moment. But the solution has yet to make a difference.

Kwon tweeted today, shortly before the UST lost 6% of its price in a single hour: “Deploying more capital – stable guys.

Steady decline, yes. Stable coin, not so much.

As in most markets, it is virtually impossible to determine to what extent Terra’s problems were the result of the crypto’s decline and to what extent Terra contributed to causing this decline.

With Bitcoin already reeling from investors turning against risky assets such as stocks and crypto, LFG – one of the largest individual holders of BTC – has spread even further into the open market, helping over $250 million in liquidations over the past 12 hours as the price has fallen too low for leveraged traders to hedge their bets.

What is at risk, then, may not just be the long-term stability of Terra, but the short-term stability of the crypto ecosystem.

Editor’s Note: This article has been updated with revised UST price figures.

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